Examining My New Savings Rate Without Debt Payments

This is actually a very practical post. Recently, Selenid and I set out to calculate our new savings rate now that our student and other commercial debt is paid off.

A big portion of our savings rate before hand went to aggressively paying off our debt. And now that the debt is gone, we need to make sure we are still saving and investing sufficiently to reach our financial freedom goals.

I think this is an important checkpoint in the journey and bears some examination.

So, let’s take a look…

Why is your savings rate important?

As a quick review, the formula for wealth as a physician is quite simple. And a savings rate of at least 20% is pretty much mandatory.

As a refresher, I listed some bullet points to the formula below or you can check out the whole original post here.

Enjoy life knowing you have a secure financial plan (in other words, your overall well-being will improve now that you’ve cared for your financial well-being)

Choose a specialty that you like
Find a job that you like
Save 20% of your pre-tax income (If you can do this as a trainee, great! But definitely you need to do this as an attending)
Pay off student debt within 5 years
Invest in broadly diversified stock, bond, and/or real estate index funds (maximize tax advantaged accounts first)
Work for 25-30 years

A quick example

We can determine (as demonstrated in this post) that we would need to save $50,000/year for 30 years assuming a very conservative 5% return to live on $120,000 annually in retirement.

If your annual gross income is $250,000, 20% of your gross income is equal to the necessary $50,000/year. This salary is right around the median (actually a bit below) average physician income.

So just about every physician should be able to do this, and really even do a lot more.

You can control your savings rate much easier than you can control your rate off return on investments. And in the beginning of your investing career, the amount you save has a MUCH bigger impact on your growing nest egg than rate off investment return.

So, we have established why a savings rate is imperative.

What counts towards your savings rate?

Here’s a quick list:

Contributions towards an emergency fund
Retirement fund contributions (401k, 403b, 457, etc)
Roth IRA contributions
529 contributions for your kids
HSA contributions
Contributions to a taxable investment account
Money contributed to real estate investing
Money put in alternative investments (although I do not recommend this)

And yes,

Debt payments

Things that don’t count towards your savings rate include,

Employer retirement contributions/Social Security taxes
Delusions, like “investing” in a boat

My savings rate including debt payments

You can see from my recent review of my money flow that around 22% of my monthly cash flow went to debt payments!

This percentage does not necessarily represent my savings rate exactly. Because the denominator in determining the percentage is my monthly cash flow i.e. post-tax money. Whereas savings rate uses gross income or pre-tax money as the denominator.

Regardless, you can see that a huge proportion of the money that we were saving went to aggressively paying off debt.

But, as a write this in September 2024, we have paid off our credit card debt, our private student loans, and my federal student loans stand to be forgiven. So, other than our mortgage, we have no other debt.

And as a result, our cash flow increases significantly. With this background, let’s look at what my new savings rate is…

My savings rate without debt payments

To calculate this, I am going to take my annual contributions to the items listed above as the numerator and my gross clinical income as the denominator.

I am not going to include real estate income or side gig income in this calculation. Mainly because we use that income to re-invest at this point. When we reach financial freedom, then this income will divert to covering expenses. But we are not at that point right now.

So, again, that savings rate equation is:

Annual contributions to investments etc./Annual gross pre-tax clinical income

So, let’s tabulate…

403b: $39,551
457: $23,000
Roth IRAs: $15,000
529s: $2,700 (seems low but we plan to pay for our kids’ college like this)
Contributions towards an emergency fund: $15,600
Contributions to a taxable investment account: $4,500

Total: $100,351

And that makes our annual savings rate…15%!

What does this mean?

Well, it’s pretty meaningful. It means that, now that our debt is paid off, our savings rate is lagging well behind the recommended 20%!

It means that we cannot continue like this. We need to make some adjustments to at least reach that 20% goal. And maybe even higher since we used to be nearly at 40%.

How do we increase our savings rate after debt?

Thankfully, we have a written financial plan to help us. And if you review our updated 2024 written financial plan here, you can see the following list of financial priorities:

~~Pay down high interest loans (>8%)~~
~~Establish emergency fund (3-6 months of expenses)~~
~~Maximize VDC (403b) retirement account~~
~~Pay down medium interest debt (6-8%)~~
~~Maximize 457 retirement account~~
~~Contribute to backdoor/spousal Roth IRA~~
Invest in better cash-flowing real estate (expected CoC return >10%)
Contribute to 529 accounts
Contribute to taxable investment account
~~Pay extra to mortgage~~ (We now pay an extra $1000 monthly to our mortgage)
~~Pay off low interest debt (<3%)~~
Maximize charitable contributions

As you can guess, the main way that we intend to increase our savings rate up to snuff is by investing more into our taxable investment accounts as well as towards cash flowing real estate.

This means that things worked out just as we planned. Because 2024 was not a great year for real estate as rates remained high and selling prices were slow to come down. For that reason we focused on paying off debt more aggressively.

But, the Fed actually just announced the first rate drop in 4 years today.

So real estate opportunities figure to become more readily available just in time for us!

In numbers…

To reach a 20% savings rate, we need to increase our rate by 5%. This translates to an additional monthly savings of about $2,800.

While Selenid and I have not yet solidified things, we will likely save even more than this.

But we will also do something else

We are still not in the “die with zero” camp. However, being debt free and having more flexibility with our savings rate will allow us to spend more.

And we plan to do so…intentionally.

It will also allow us to give more to causes that we are passionate about. That is on our financial priority list as well.

The final word

Our personal finances are always evolving. But naturally some stages on the path emerge

And as we progress on the path towards financial freedom, we need to constantly evaluate at these stages to make sure we are still hitting all the checkmarks to reach our financial goals.

Hopefully this example shows how a well-intentioned plan can fall out of balance if not checked and tweaked along the way!